In general, investors desire to mitigate the risk of an investment while increasing the probability of achieving a good return. Venture capital investments in technology companies can lead to very high rates of return, but the risks are also high. The risks are high with venture capital because the required investment is often large and there is typically no mechanism to offset a significant loss if the enterprise funded by the venture capital is not a commercial success. Also, while there is the ability to invest in multiple companies within a sector, venture capital firms generally support only one in a group of competing start-ups.
An investment vehicle such as a hedge fund or a mutual fund can spread the risk over several companies, technologies or even types of investment instruments. These investment vehicles, while spreading risk and typically having lower required investment thresholds, may not offer the potentially high returns or involve the type of cutting edge technology that venture capital can reach. Moreover, hedge and mutual funds are often are restricted from investing in start-up companies due to the risk inherent in the lack of public market liquidity status for early stage and thus their capital is not traditionally available to this sector of company.
Accordingly, there is a need for an improved and more flexible investment that can address the drawbacks of current investment methods.